Home Equity Loan vs HELOC: How to Calculate Your Actual Monthly Cost

The Two Formulas That Drive Every Number

Home equity loans and HELOCs use different payment structures. Understanding each formula prevents the most expensive comparison mistake borrowers make.

A home equity loan uses standard amortization. The formula is:

M = P x (r(1 + r)^n) / ((1 + r)^n - 1)

Where M is the monthly payment, P is the principal, r is the monthly interest rate (annual rate divided by 12), and n is the total number of monthly payments.

A HELOC has two distinct phases. During the draw period, typically 10 years, most lenders charge interest only on the outstanding balance. That payment is simply:

Draw Period Payment = Outstanding Balance x (Annual Rate / 12)

When the draw period ends, the remaining balance converts to a fully amortizing loan. The repayment period runs 10 to 20 years depending on the lender, and the same amortization formula above applies to whatever balance remains.

That phase transition is where borrowers get hurt financially.

Worked Example 1: Home Equity Loan at 8.5% for 10 Years

A $75,000 home equity loan at a fixed 8.5% annual rate with a 120-month term produces a single, predictable payment.

Monthly rate r = 8.5% / 12 = 0.7083%

n = 120 months

M = 75,000 x (0.007083 x (1.007083)^120) / ((1.007083)^120 - 1)

(1.007083)^120 = 2.3396

M = 75,000 x (0.007083 x 2.3396) / (2.3396 - 1)

M = 75,000 x 0.016570 / 1.3396

M = 75,000 x 0.012369

M = $927.18/month

Total repaid over 10 years = $927.18 x 120 = $111,261.60

Total interest paid = $111,261.60 - $75,000 = $36,261.60

The closing costs on a home equity loan typically run 2% to 5% of the loan amount. On $75,000, that is $1,500 to $3,750. Lenders sometimes roll these into the balance. If they do, recalculate P as $76,500 to $78,750 accordingly.

Worked Example 2: HELOC at 8.5% With Full Draw and 20-Year Repayment

A $75,000 HELOC at 8.5% with a 10-year draw period and a 20-year repayment period looks cheaper initially. It is not cheaper overall if you carry the full balance.

Draw Period Payment (interest only):

$75,000 x (0.085 / 12) = $75,000 x 0.007083 = $531.25/month

For 10 years, that payment totals $531.25 x 120 = $63,750. Every dollar of that is interest. None reduces principal.

Repayment Period Payment:

At month 121, the $75,000 balance converts to a 20-year amortizing loan at whatever the current rate is. Assume the rate remains 8.5% (a conservative assumption given HELOC rates are variable and indexed to the prime rate).

n = 240 months

M = 75,000 x (0.007083 x (1.007083)^240) / ((1.007083)^240 - 1)

(1.007083)^240 = 5.4729

M = 75,000 x (0.007083 x 5.4729) / (5.4729 - 1)

M = 75,000 x 0.038786 / 4.4729

M = 75,000 x 0.008671

M = $650.33/month

Total repayment period cost = $650.33 x 240 = $156,079.20

Total interest in repayment period = $156,079.20 - $75,000 = $81,079.20

Combined HELOC interest cost = $63,750 + $81,079.20 = $144,829.20

Versus $36,261.60 in total interest on the home equity loan. The HELOC costs $108,567.60 more in interest when you carry the full balance for the full term.

That gap narrows significantly if you pay down principal aggressively during the draw period. But that requires discipline and a plan, not just good intentions.

Variable Rate Risk Changes the HELOC Math Materially

HELOCs carry variable rates tied to the prime rate. The prime rate moved from 3.25% to 8.50% between March 2022 and July 2023. A borrower with a $75,000 HELOC saw their draw period payment move from $202.08/month to $531.25/month in that window.

To stress-test a HELOC, calculate the repayment period payment at the current rate, then recalculate at current rate plus 2% and plus 4%.

At 10.5% on a 20-year repayment of $75,000:

M = 75,000 x (0.00875 x (1.00875)^240) / ((1.00875)^240 - 1)

(1.00875)^240 = 8.0475

M = 75,000 x (0.00875 x 8.0475) / (8.0475 - 1)

M = 75,000 x 0.070416 / 7.0475

M = 75,000 x 0.009992

M = $749.40/month

That is $99.07 more per month than the 8.5% scenario. Over 20 years, that adds $23,776.80 in additional payments. Model this scenario before committing to the HELOC structure.

When a Home Equity Loan Wins on Total Cost

A home equity loan beats a HELOC on total cost in three situations. First, when you need the full amount immediately and will not pay it down early. Second, when you want rate certainty over a 10-to-15-year horizon. Third, when you lack the discipline to make principal payments during a draw period.

The fixed structure of a home equity loan is not a constraint. It is a cost-control mechanism. You cannot accidentally let interest compound on a balance you forgot to reduce.

When a HELOC Has Lower Total Cost

A HELOC produces lower total interest in one primary scenario: you draw funds gradually, you make principal payments during the draw period, and you pay off the balance before the repayment period begins or early in the repayment period.

A borrower who draws $75,000 over five years, averaging $37,500 outstanding during the draw period, and eliminates the balance by year 12 total, pays roughly $48,000 in interest. That is $11,738 less than the home equity loan example above.

The math rewards measured, disciplined use. Lump-sum needs belong in a home equity loan.

How to Run This Comparison for Your Own Numbers

The calculations above require four inputs: loan amount, interest rate, draw period length, and repayment period length. Changing any one of them shifts the comparison result.

Use the CalcMoney mortgage calculator to model both scenarios side by side. Enter your home equity loan terms first and record the monthly payment and total interest figure. Then model the HELOC repayment period payment using the remaining balance after your expected draw period paydown. Compare the total interest figures, not the monthly payments during the draw period.

The draw period payment is a marketing number. The repayment period payment and total interest cost are the decision numbers.

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Results are estimates for informational purposes only. Consult a licensed financial professional before making financial decisions.